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Monday, 20 April 2015

China Readies for Islamic Finance With a Little Help From Gulf

The most populous country in the world may be poised to get serious about Islamic finance, and banks in the Gulf Cooperation Council are taking note.

Qatar International Islamic Bank QSC and QNB Capital LLC last week signed an agreement with China-based Southwest Securities Co. to develop Shariah-compliant finance products in the country. Seven months after Hong Kong sold its debut sukuk, China is exploring Islamic finance for projects from hospitals to metro stations, according to London-based Dome Advisory Ltd., which is working with a government-owned fund in Shanghai to finance five projects.

“The Hong Kong sukuk has given more confidence to the Chinese market,” Sheikh Bilal Khan, a Shariah scholar and director of Dome, said by phone on April 16. “Having seen Hong Kong and the U.K. do this, and the fact Islamic finance is growing at a fast rate, in the next three to five years China will be a big player. It’s unavoidable.”

China’s growing interest in Shariah-compliant finance will add momentum to an industry that Ernst & Young LLP estimates will grow to $3.4 trillion by 2018, from $1.7 trillion two years ago. The world’s second-biggest economy in January approved plans to accelerate 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion), according to people with knowledge of the matter, in an effort to boost an economy expanding at the slowest pace since 1990.

HONG KONG DEBUT

Southwest Securities, based in Chongqing and majority-owned by the city’s state-owned enterprises, is seeking access to investors “primarily in Qatar and the Middle East,” according to an e-mailed statement from Qatar International Islamic Bank last week. The partnership is also intended to help the Qatari lenders access the Chinese market. The country is Qatar’s fourth-biggest trading partner, according to data compiled by Bloomberg.

Ningxia, an autonomous region in northwest China where a third of the 6.5 million population are Muslim, plans a $1.5 billion sukuk sale, according to a December exchange filing.

Hong Kong, the city that returned to Chinese rule from the British in 1997, sold $1 billion of five-year sukuk in 2014 and said it wants to become an Islamic finance hub. The notes yielded 1.74 percent on April 17, according to data compiled by Bloomberg. National Bank of Abu Dhabi PJSC, the United Arab Emirates’ biggest lender by assets, Abu Dhabi Islamic Bank PJSC, Dubai-based Emirates NBD PJSC and Qatar’s QInvest LLC all worked on the deal.

CHINA CALLING

While China in August allowed local governments to sell bonds directly to refinance debt following a two-decade ban, the country will need to make more regulatory changes to promote Islamic finance, according to Rizwan Kanji, a Dubai-based partner at law firm King & Spalding LLP, who helps structure Islamic deals.

“It’s the first step in the right direction, but there is work to be done before we see successful issuances,” he said by phone on April 16. Investors need a better understanding of the legal infrastructure and “enforceability issues,” he said.

China’s economy is forecast to expand 7 percent in 2015, according to median of 60 economists’ estimates compiled by Bloomberg, the slowest pace in about 25 years. The projects approved in January span industries including oil and gas pipelines, health, clean energy, transportation and mining, and will be funded by the central and local governments, state-owned firms, loans and the private sector, the people said.

“There’s a lot of appetite for GCC money,” Dome’s Khan said. “This agreement will hopefully pave the way for Islamic finance to pick up steam in mainland China.